Budget: 2008: Housing

Insure your home against drop in value

Homeowners may be able to insure themselves against a fall in the value of their home under proposals announced by Alistair Darling.

In the Housing Finance Review, a 93-page document issued with the Budget, the Treasury says it intends to investigate the possible development of insurance based on house price movements, which would be hedged against detailed house price indices. Such insurance would pay out if the value of a home declined by more than the value of equivalent property in the indices.

The government already issues a house price index based on Land Registry data that includes figures at national, regional, county and London borough level, so this data could be used alongside that from other house price indices.However, the Treasury concedes that the challenge is to use an index local enough that the homeowner feels the insurance offers real protection compared to house prices in their area, rather than regionally or nationally. The movement of prices in one London borough, for example, can be vastly different from that of the borough next door.

One industry expert who is consulting with the government on the proposals said that developing the right indices on which to base the insurance was 'complicated' and meant that the product was probably a long way off.

Hours after the Budget one insurance company, MarketGuard, announced that in two months' time it would launch the first interest-rate insurance product that covered individuals against increases in their mortgage payments as a result of rises in the Bank of England base rate.

MarketGuard estimates that out of the 12 million mortgages held in the UK, seven million are variable-rate mortgages, which means repayments fluctuate depending on the prevailing Bank of England rate.

For example, someone with a £100,000 mortgage will pay around £9 a month for the insurance. If rates were to rise by 0.25 per cent, the same person would see their mortgage go up by around £15 on a repayment basis or £20 if they have an interest-only mortgage.

However, David Hollingworth of London & County mortgage brokers said: 'For anyone worried about rising rates, going with a fixed-rate mortgage is the best insurance policy.'